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Monday, December 15, 2014

Economics is a Fraud - Part 3

A recent paper called "On the Superiority of Economists" has engendered a bit of discussion: The study says:

In this essay, we investigate the dominant position of economics within the network of the social sciences in the United States. We begin by documenting the relative insularity of economics, using bibliometric data. Next we analyze the tight management of the field from the top down, which gives economics its characteristic hierarchical structure. Economists also distinguish themselves from other social scientists through their much better material situation (many teach in business schools, have external consulting activities), their more individualist worldviews, and in the confidence they have in their discipline’s ability to fix the world’s problems. Taken together, these traits constitute what we call the superiority of economists, where economists’ objective supremacy is intimately linked with their subjective sense of authority and entitlement. While this superiority has certainly fueled economists’ practical involvement and their considerable influence over the economy, it has also exposed them to more conflicts of interest, political critique, even derision.

The authors point out that economists demonstrate their self-belief in subtler ways too. Articles in the American Economic Review cite the top 25 political-science journals one-fifth as often as the articles in the American Political Science Review cite the top 25 economics journals. Another study found that American economics professors were less likely than their peers in other subjects to agree with the notion that “interdisciplinary knowledge is better than knowledge obtained by a single discipline.”

The odd thing, the authors argue, is that we believe in economists almost as much as they believe in themselves. Journalists and politicians seek strong arguments and clear answers. Most academics are reticent types: historians, for instance, question whether you can learn anything from history. “For a moderate fee,” jokes Deirdre McCloskey, an economic historian, “an economist will tell you with all the confidence of a witch doctor that interest rates will rise 56 basis points next month or that dropping agricultural subsidies will increase Swiss national income by 14.8%.”

The power of self-belief (The Economist) Combine the arrogance, insularity and self-belief with the many, many flaws we saw in economics in the previous two posts and you've got a recipe for disaster. Yet politicians constantly use the work of economists as a smoke screen for their policies, whether it is "free trade," eliminating the minimum wage (a favorite of conservative economists), the dangers of a social safety net (conservative econmists say people refuse to work if we have one), allowing unlimited mass immigration, to the dangers of debt.

On that last point, a real-world case was the Reinhart-Rogoff affair where two Harvard economists published a paper which claimed that growth went negative when a country's debt equaled 90 percent of its GDP. This economics paper was cited ad nauseum by every conservative politician intent on slashing spending (on the social safety net, not defense of course). This is a concrete example of economics affecting actual policy for actual human beings, and giving cover to an ideological position. Yet it turned out that the paper being waved in the face of everyone by conservatives contained a spreadsheet error which completely invalidated the results:

Also, a recent study on economists found that:

"We first found that an economist’s research area is correlated with his or her political leanings. For example, macroeconomists and financial economists are more right-leaning on average while labor economists tend to be left-leaning. Economists at business schools, no matter their specialty, lean conservative. Apparently, there is “political sorting” in the academic labor market."

So conservative economists study what they want to study and liberal economists study what they want to. And no doubt their conclusions uphold their ideologies. But note that even "liberal" economists have bought into the underlying assumptions of the field. I always found it interesting that the economists at "think tanks" always come up with conclusions that validate the world-views of the people funding the think-tank. Yet these results are used by politicans to justify their actions all the time. Of course if one think-tank's conclusions contradict another, you can always pick which one you want to use. After all, that's how science works, right?

From my experience, left-wing economists tend to focus on whether or not
the economy is delivering beneficial social outcomes and why.
Right-wing economists, by contrast, tend to advocate policies that
increase money flows and maximize returns to capital, the idea being
that maximizing money flows and wealth of the richest Americans will produce maximal
beneficial outcomes to all levels of society via the trickle-down
effect, and that decreasing such flows by any means will have negative
effects for everyone. These are ideologies, and the conclusions flow
from that. Both claim that the economy is somehow free of political
decisions or considerations.

And finally, debate and disagreement amoung economists has slowly declined as "heterodox" economists have been purged from the profession:

In the age of "Freaknomics," economists are expected to experts on all topics - from how to increase food supply to how to decrease crime rates, to how to decrease teen pregnancy, despite the fact that all their training is in money flows and transactions. The government hires scores of economists to advise it on every policy from agriculture to health to transportation to energy to immigration. Economists even rule countries directly, as the technocrats in Europe. After all, whatever is good for "the economy" must be good for society, right?

As for economists’ “influence over the economy,” I am going to take a wild guess and say that it isn't because of their arrogance or hierarchical insularity or “sense of authority and entitlement.” It’s probably because…drumroll…economics is the discipline that studies the economy. If politicians want to know how to reduce cancer rates, they should go to a biologist. If they want to know how to shoot missiles at Vladimir Putin, they should go to a physicist. If they want to know how to boost productivity at U.S. companies, or increase employment, or auction off broadcast spectrum rights, whom should they ask for advice? A sociologist?

But there is one way in which economists clearly do dominate the other social sciences, and that is in the amount of money they make...

He concludes that economists are paid so much because they are the most facile with statistics and data-crunching.

The technical skill I am talking about is statistics. Economists learn a lot of statistics -- much more than anyone else except for applied mathematicians and statisticians. There is a whole branch of economics, known as econometrics, dedicated to statistics. Most of the empirical work that economists do is applied statistics. Statistics is hugely valuable in the real world. Simply knowing how to run, and interpret, a regression is invaluable to management consultants. Statistics is now permeating the IT world, as a component of data science -- and to do statistics, economists have to learn how to manage data. And statistics forces economists to learn to code, usually in Matlab.

However, if all that was needed was statistical analysis, wouldn't it make more sense just to hire someone who knew the relevant mathematical techniques? Why spend all the time learning all the other stuff? After all, there were hardly any economics majors before World War 2 - it was an obscure discipline. Business management was much more important, and that was either done by the owner of the business or self-taught.

I contend that economists are paid so much because they are the lackeys of the banking/political overclass who reward them handsomely for coming up with justifications that can be waved in the collective face of the masses about why the rich are gaining ever more from the economy while the rest of us are getting poorer, and avoiding uncomfortable discussions of negative social outcomes or exploitation or unfairness. We've already seen what happens to economists (presumably with the same econometrics training as their brethren) who depart from the "orthodox" party line. Again, "it is difficult to get a man to understand something when his salary depends on him not understanding it." If that isn't the best summary of the economics "profession" I don't know what is.

At every turn along the road to hell, from deindustrialization and "free trade" policies, to letting millions of immigrants into the U.S., to eliminating guaranteed pensions in favor of 401Ks, to soaring college and health care costs, to CEOs making over 300 times the average worker, to "maximizing shareholder value," to monopolies in every industry, to deregulating Wall Street and financializing the economy - the economists were out front-and-center with justifications for every single one of these things!

They said we would be okay because of the "service economy" (fast-food and retail jobs instead of manufacturing jobs). They said saving for your own retirement was okay because salaries, the stock market and housing prices would go up forever (Americans are now 40 percent poorer than before the recession). They said unlimited immigration was just for jobs "Americans don't want to do" (which jobs are those?), then said we needed more H1-B visas because there weren't enough Americans for high-paying tech jobs. They said CEOs deserved their obscene salaries and bonuses because of their genius and awesome marginal productivity (despite often running companies into the ground and leaving with golden parachutes in the midst of mass layoffs). They said raising the minimum wage would cause unemployment. They said Americans were unemployed because they needed 'more education' (despite increasing college attendance rates and people overqualified for many jobs). They said monopolies are okay because they delivered value to the consumer (Americans pay more for slower telecom than anywhere else in the world). They said the "private sector" was always more efficient that the public sector, despite Americans paying twice as much as the rest of the world for health care and education. They said privatization would save us money (private prisons are guaranteed certain rates of incarceration by state governments). They said deregulating markets would cause economic growth (remember Enron?). They said bank mergers weren't a problem (1 trillion in bailouts later) Every single one of these policies was justified by the economics profession, and (most) people believed it!

Now they are saying that automation won't cause job losses, we need even more immigration, lower birth rates are a crisis, we need to cut the deficit even more, we can't afford Social Security, raising taxes on the rich will harm growth, resource limitations are not a problem, etc., etc.

Institutional economics is superior in my opinion because it actually looks at the interaction between various forces and institutions in society and how they evolve over time. These relations are not static, as with a mathematical theory, but constantly changing with different forms of technology and social norms. The economics that worked in 1776 or 1880 or 1932 will not work in 2014, or in 2100. This is the problem with so many economics theories which view the economy as something that can be “solved” once and for all like an engineering problem. The economy is not a neat, clean, clockwork mechanism. It is messy and factious and constantly evolving, just like society. It is an ad-hoc amalgamation of competing interests, parties, groups, and coalitions, each with their own agenda.

This is a major problem with Communism and it’s mirror image Libertarianism, which see an ideal economy working according to abstract theories that do not take human nature into account. Both appeal to a certain type of person who is intelligent and rational, and wants the world to behave according to predictable rules, but it inevitably leads them astray. In reality, the economy, like society, is formed by a series of compromises. It is never reaches perfection or an end state. The problem in our society today is that all interests – save one—have no representation. The only interest that can get its way is the oligarchy of money and power – the one percent—and the rest of us have no say. It is that which is tearing society apart all across the world. Rather than a series of compromises, it is designed for one purpose - to maximize profits and returns to capital - all other needs be damned. And economics provides the justification for this with its utilitarian, productivist and materialist philosophies.

And this has consequences, from hospitals running out of drugs in Greece, to protesters in the streets of Spain, Mexico and Thailand, to the increasing rate of suicide in America, to the destruction of entire nations like Iraq. Make no mistake, economics as practiced today has blood on its hands.

Economics is a fraud and a pseudoscience. When it comes to social policy, it's high time we stopped listening.

2 comments:

Just for future reference, it might be worth clearly labeling Libertarianism as Right-Libertarianism or Randian economics or something like that. Lowercase L libertarianism is more accurately opposite to authoritarianism, as nicely shown by these folks:

I tend to distinguish libertarianism from anarchism. Anarchism - which looks at *all* relations of hierarchy and power, is a philosophy that has merit. Libertarianism, as currently constituted, avoids any questions of wealth, control, money, power, and private property, defines these arbitrarily as "natural," and instead only carps about the limitations of the powerful to do what they want to the rest of us.